Standby Letter of Credit

Also found in: Acronyms.

Standby Letter of Credit

Documents evidencing failure of the bank's customer (the applicant) to pay an obligation when due.

Standby letter of credit

Agreement to guarantee invoice payments to a supplier; a standby LOC promises to pay the seller if the buyer fails to pay.

Standby Letter of Credit

A statement issued by a bank to the buyer of a good stating that the seller will receive payment on time and in the correct amount. If the buyer fails to make payment, the bank will do so on his/her behalf. The buyer presents a letter of credit to the seller, which virtually eliminates the risk that the seller will not be paid. Letters of credit have become very common in international commerce, as distance and other factors make it difficult for sellers to establish the creditworthiness of every buyer.

standby letter of credit

Usually shortened to standby or to LOC. It is the agreement by a lender to disburse funds to a third party if the lender's customer defaults on its obligations to that third party (called the beneficiary).

Rather than pay a large security deposit for a lease, a tenant might offer the landlord a standby letter of credit (LOC) issued by the tenant's bank. For all but the most exceptionally credit-worthy customers, the bank will usually require cash collateral in the form of a certificate of deposit or comparable asset.

The issuance fee is generally in the range of 1/2 to 2 percent per year for the issuance of the standby,which should be less than the money earned by the cash collateral.

The LOC will usually specify the exact manner in which the beneficiary must collect funds, such as presentation of the original LOC at a certain branch location to a particular officer at that location, accompanied by a statement regarding the customer's default. Normally, the statement must be worded exactly in the manner specified within the body of the LOC and any paraphrasing at all will result in denial of payment.The LOC will also have a date and time of expiration.

Landlords (or anyone else) accepting standby letters of credit should be aware that the law in this area is very precise in its requirements.In many states,minor errors in wording the documents presented in order to collect on a letter of credit might result in the bank's legally justifiable refusal to pay. Presenting documents to the wrong person, or at the wrong location, could result in refusal to pay.That refusal might not be curable because of the expiration of the time limits within which to make the claim.The better practice is to pay a lawyer with good malpractice insurance to review the documents and prepare the request for payment.

References in periodicals archive ?
Unlike a documentary letter of credit, the beneficiary of a standby letter of credit must first look to its customer for payment.
InsurFinancial Holdings Plc has arranged the standby letter of credit which expires on 4 December 2016.
453-1(b)(e) said that a standby letter of credit is not payment under IRC section 453.
Joint Certification Influence of Bank Issuance of Standby Letter of Credit and Associated Credit Rating
Deposits and guarantees required: A parent company guarantee or irrevocable standby letter of credit may be required to protect any significant up-front payment by the University.
A standby letter of credit is a valuable risk-mitigation tool.
Series 1's rating is also supported by TNBJ's superior debt coverage that is underpinned by a well-matched debt-repayment profile and stringent covenants under the series, as well as a standby letter of credit (SBLC) procured by TNB to meet the requirements of the Company's Finance Service Reserve Account.
The bonds will be supported by an irrevocable standby letter of credit
M2 EQUITYBITES-July 11, 2012--Bank of China provides USD100m standby letter of credit to Eco Building Products(C)2012 M2 COMMUNICATIONS http://www.
The revolving facility also includes a standby letter of credit issuing facility and provides for borrowings in US dollars, as well as certain foreign currencies and other currencies subject to agreement by the lenders.
It also rated the company's INR8m standby letter of credit and INR1m bank guarantee at A4.
If the buyer performs his or her obligation, there will be no need for the beneficiary to draw against the standby letter of credit which supports the obligation.